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Notes on Company Law
(Contributed by Avinash
Explain the Advantages and Disadvantages of
Incorporation of a Company. (L)
Introduction
A company, in common parlance, means a group of persons associated together for the attainment of a common end, social or economic. It has “no strictly technical or legal meaning.”
According to sec. 3 (1) (ii) of the Companies Act, 1956 a company means a company formed and registered under the Companies Act, 1956 or any of the preceding Acts. Thus, a Company comes into existence only by registration under the Act, which can be termed as incorporation.
Advantages of incorporation
Incorporation offers certain advantages to a company as compared with all other kinds of business organizations. They are
1) Independent corporate existence - the outstanding feature of a company is its independent corporate existence. By registration under the Companies Act, a company becomes vested with corporate personality, which is independent of, and distinct from its members. A company is a legal person. The decision of the House of Lords in Salomon v. Salomon & Co. Ltd. (1897 AC 22) is an authority on this principle:
One S incorporated a company to take over his personal business of manufacturing shoes and boots. The seven subscribers to the memorandum were all his family members, each taking only one share. The Board of Directors composed of S as managing director and his four sons. The business was transferred to the company at 40,000 pounds. S took 20,000 shares of 1 pound each n debentures worth 10,000 pounds. Within a year the company came to be wound up and the state if affairs was like this: Assets- 6,000 pounds;
Liabilities- Debenture creditors-10,000 pounds, Unsecured creditors- 7,000 pounds.
It was argued on behalf of the unsecured creditors that, though the co was incorporated, it never had an independent existence. It was S himself trading under another name, but the House of Lords held Salomon & Co. Ltd. must be regarded as a separate person from S.
2) Limited liability - limitation of liability is another major advantage of incorporation. The company, being a separate entity, leading its own business life, the members are not liable for its debts. The liability of members is limited by shares; each member is bound to pay the nominal value of shares held by them and his liability ends there.
3) Perpetual succession - An incorporated company never dies. Members may come and go, but the company will go on forever. During the war all the members of a private company, while in general meeting, were killed by a bomb. But the company survived, not even a hydrogen bomb could have destroyed it (K/9 Meat Supplies (Guildford) Ltd., Re, 1966 (3) All E.R. 320).
4) Common seal - Since a company has no physical existence, it must act through its agents and all such contracts entered into by such agents must be under the seal of the company. The common seal acts as the official seal of the company.
5) Transferable shares - when joint stock companies were established the great object was that the shares should be capable of being easily transferred. Sec 82 gives expression to this principle by providing that “the shares or other interest of any member shall be movable property, transferable in the manner provided by the articles of the company.”
6) Separate property - The property of an incorporated company is vested in the corporate body. The company is capable of holding and enjoying property in its own name. No members, not even all the members, can claim ownership of any asset of company’s assets.
7) Capacity for suits - A company can sue and be sued in its own name. The names of managerial members need not be impleaded.
8) Professional management - A company is capable of attracting professional managers. It is due to the fact that being attached to the
Formality and expense- Incorporation is a very expensive affair. It requires a number of formalities to be complied with both as to the formation and administration of affairs.
Company not a citizen- In State Trading Corporation of India v. CTO , the SC held that a company though a legal person is not a citizen neither under the provisions of the Constitution nor under the Citizenship Act.
Distinction between Company and Partnership.(M)
The principal points of distinction between a company and a partnership are:
Legal status - A company is a distinct legal person. A partnership firm is not distinct from the several members who compose it.
Property - In partnership, the property of the firm is the property of the members comprising it. In a company, it belongs to the company and not to the members comprising it.
Mode of creation - A company comes into existence after registration under the Companies Act, 1956, while registration is not compulsory in case of a partnership firm.
Agents - Partners are the agents of the firm, but members of a firm are not its agents.
Contracts - A partner cannot contract with his firm, whereas a member of a company can.
Transferability of shares - A partner cannot transfer his share and make the transferee a member of the firm without the consent of other partners whereas a company’s share can easily be transferred unless the Articles provide otherwise and the transferee becomes a member of the firm.
Liability - A partner’s share is always unlimited whereas that of a shareholder may be limited either by shares or a guarantee.
Perpetual succession - The death or insolvency of a shareholder or all of them does not affect the life of the company, whereas the death or insolvency of a partner dissolves the firm, unless otherwise provided.
Audit - A company is legally required to have its accounts audited annually by a chartered accountant, whereas the accounts of the partnership are audited at the discretion of its members.
Number of members - The minimum number of partners in a firm is 2 and maximum is 20 in any business and 10 in banking business. In case of a private company the minimum number of members are 2 and maximum is 50. In case of a public company the min num of members are 7 and no max limit.
Dissolution- a company can only be dissolved as laid down by law. A partnership firm can be dissolved at any time by an agreement.
When can Corporate Veil of a Company be Lifted?(L)
For all purposes of law a company is regarded as a separate entity from its shareholders. But sometimes it is sometimes necessary to look at the persons behind the corporate veil. The separate entity of the company is disregarded and the schemes and intentions of the persons behind are exposed to full view which is known as lifting or piercing the corporate veil. This is usually done in the following cases
1) Determination of character - In Daimler Co Ltd. v. Continental Tyre and Rubber Co. , a company was incorporated in England for the purpose of selling tyres manufactured in Germany by a German company. The German company held the bulk of the shares in the English company and all the directors of the company were Germans, resident in Germany. During the First World War the English company commenced an action to recover a trade debt. And the question was whether the company had become an enemy company and should therefore be barred from maintaining the action.
The House of Lords held that though the company was registered in England it is not a natural person with a mind or conscience. It is neither loyal nor disloyal; neither friend nor enemy. But it would assume an enemy character if the persons in de facto control of the company are residents of an enemy country.
6) Under statutory provisions - The Act sometimes imposes personal liability on persons behind the veil in some instances like, where business is carried on beyond six months after the knowledge that the membership of company has gone below statutory minimum(sec 45)- Madanlal v. Himatlal , when contract is made by misdescribing the name of the company(sec 147), when business is carried on only to defraud creditors(sec 542).
Write a Note on Pre-incorporation Contracts.(M)
Sometimes contracts are made on behalf of a company even before it is duly incorporated. These are called as pre-incorporation contracts. Two consenting parties are necessary to a contract, whereas a company before incorporation is a non-entity. Therefore, following are the effects of pre-incorporation contracts.
Company cannot be sued on pre-incorporation contracts - A company, when it comes into existence, cannot be sued on pre- incorporation contracts. In English and Colonial Produce Co, Re , a solicitor on the request of promoters prepared a company’s documents and spent time and money in getting it registered. But the company was not held to be bound to pay for those services and expenses.
Company cannot sue on pre-incorporation contracts - A company cannot by adoption or ratification obtain the benefit of a contract made on its behalf before the company came into existence. In Natal Land and Colonization Co v. Pauline Colliery Syndicate , the promoters of a proposed company obtained an agreement from a landlord that he would grant lease of coal mining rights to the company. The company could not, after incorporation, enforce this contract.
Agents may incur personal liability - The agents who contract for a proposed company may sometimes incur personal liability. In Kelner v. Baxter , the promoters of a projected hotel company purchased wine from the plaintiff on behalf of the company. The company came into being but, before paying the price went into liquidation. They were held personally liable to the plaintiff.
Ratification of a pre-incorporation contract
So far as the company is concerned it is neither bound by nor can have the benefit of a pre-incorporation contract. But this is subject to the provisions of the Specific Relief Act, 1963.
Section 15 of the Act provides that where the promoters of a company have made a contract before its incorporation for the purposes of the company, and if the contract is warranted by the terms of incorporation, the company may adopt and enforce it. In Vali Pattabhirama Rao v. Ramanuja Ginning and Rice Factory , a promoter of a company acquired a leasehold interest for it. He held it for sometime for a partnership firm, converted the firm into a company which adopted the lease. The lessor was held bound to the company under the lease.
Section 19 of the Specific Relief Act provides that the other party can also enforce the contract if the company has adopted it after incorporation and the contract is within the terms of incorporation.
Is company a citizen?(S)
A company, though a legal person, is not a citizen. This has been the conclusion of a special bench of the Supreme Court in State Trading Corporation of India v. CTO (AIR 1963 SC 1811).
The State Trading Corporation of India is incorporated as a private company under the Companies Act, 1956. All the shares are held by the President of India and two secretaries in their official capacities. The question was whether the corporation was a citizen. One of the contentions put forth on behalf of the corporation was that “if the corporate veil is pierced, one sees three persons who are admittedly the citizens of India”, and, therefore, the corporation should also be regarded as a citizen.
But it was held that, “neither the provisions of the Constitution, Part II, nor of the Citizenship Act, either confer the right of citizenship on or recognize as citizen, any person other than a natural person. In striking words the Supreme Court observed,
into a company with or without limited liability. They can do so by subscribing their names to a memorandum of association and by complying with other documents.
If the Registrar finds the documents to be satisfactory, he registers them and enters the name of the company in the Register of Companies and issues a certificate called the Certificate of Incorporation. Certificate of Incorporation brings the company into existence as a legal person. It is the conclusive evidence that all the requirements under the Act in respect of registration and matters precedent and incidental thereto have been complied with and that the association is a company authorized to be registered and duly registered under the Act.
Write a Note on Certificate of Incorporation (sec 34
and 35)(S)
Certificate of Incorporation is the certificate issued by the Registrar of Companies ion registration of a company. It brings the company into existence as a legal person. It marks the birth of the company, and the date mentioned on it is conclusive, even if wrong.
Certificate of Incorporation is the conclusive evidence that all the requirements under the Act in respect of registration and matters precedent and incidental thereto have been complied with and that the association is a company authorized to be registered and duly registered under the Act(s 35). This is illustrated by the Privy Council in Moosa Goolam Ariff v. Ebrahim Goolam Ariff , in which the memorandum of a company was signed by two adult members and by a guardian on behalf of the other five members, who were minors. The Registrar, however, registered the company. The plaintiff’s contention that the Certificate of Incorporation should be declared void was rejected as the certificate is conclusive for all purposes.
However, the illegal objects of the company do not become legal by the issue of the certificate. The certificate is subject to judicial review where it happens to be issued to a company which on account of illegal objects should not have been registered. This is so because a company cannot be registered for illegal purposes.
Explain the Clauses of Memorandum of Association
OR
Explain the Importance of Memorandum of
Association.(L)
Introduction
One of the essentials for the registration of a company is memorandum of association (sec 33). It is the first step in the formation of a company. Its importance lies in the fact that it contains the fundamental clauses which have often been described as the conditions of the company’s incorporation.
Memorandum of association is divided into 5 clauses:
- Name clause
- Registered office clause
- Objects clause
- Liability clause and
- Capital clause
Name clause
The first clause states the name of the proposed company. The name of a corporation is the symbol of its personal existence. The name should not be, in the opinion of the Central Government, undesirable. Generally it is so when it is identical with or too nearly resembles the name of another company. If the company is with “limited liability” the last word of the name should be “limited” and in case of a private company “private limited”. The Central Govt. may permit a company to drop the word limited from its name, if
a) If the company is formed for the promotion of arts, commerce, religion, science, charity or any other useful object. b) The company is to apply its income in promoting its objects and prohibits the payment of dividend to its members.
The last clause states the amount of capital with which the company is proposed to be registered and the kinds, number and value of shares into which the capital is to be divided.
After the Companies (Amendment) Act, 2000, the minimum paid up capital of a public company must be five lakh rupees or more and one lakh or more for a private company.
Explain the Procedure for Alteration of Memorandum
of Association.(M)
Alteration of name (sec 21)
A company may change its name at any time by passing a special resolution and with the prior approval of the Central Government. Where a company has been registered with a name which is undesirable, the same may be changed by an ordinary resolution and with the prior approval of the Central Government. In such a case the central government may also within 12 months of registration direct the company to rectify its name and the company must change the name within 3 months from the date of direction unless the time is extended. The new name would also require the prior approval of the Central Govt. The British Diabetic Society was compelled to change its name to something that would not impinge the goodwill of the British Diabetic Association (British Diabetic Association v. The Diabetic Society).
When a company changes its name, the Registrar of Companies has to enter the new name in the register and a new certificate of incorporation must be issued with necessary alterations.
However, it should be noted that no approval will be required if the change consists merely addition or deletion of the word “private” consequent on the conversion of a public company into a private company or vice versa.
Effect of such change : The old name of the company will stand abolished and the new name will come into existence from the date of passing such resolution. However, it does not affect the rights and obligations of the company (sec 23).
Alteration of registered office clause (sec 17)
Shifting of registered office from one State to another is a complicated affair. For this purpose, sec 17 requires
a) A special resolution of the company. b) The sanction of the Company Law Board. The Board can confirm the alteration only if the shifting of the registered office from one state to another is necessary for any purposes detailed in sec 17(1).
Alteration of objects (sec 17)
A company may alter its objects with the passing of a special resolution. The confirmation of the Company Law Board is not required for this purpose. An alteration of the objects is allowed only for the purposes mentioned in sec 17(1).
Registration of alteration (sec 18)
In case of alteration of objects, a copy of the resolution should be filed with the Registrar of Companies within one month from the date of resolution. In the case of inter-state shifting of the registered office a certified copy of the Board’s order and a printed copy of the altered memorandum must be filed with the Registrar within three months of the Board’s order. Within one month the Registrar will certify the registration. Alteration takes effect when it is so registered.
Articles of Association.(L)
Introduction
Articles of Association is the second important document, which in case of some companies, has to be registered along with the memorandum. As per sec 26, companies which must have articles are:
- Unlimited companies;
- Companies limited by guarantee;
Importance of Articles of Association
Under sec 36, the memorandum and the articles when registered, shall bind the company and its members to the same extent as if it had been signed by them and had contained a covenant on their part that the memorandum and the articles shall be observed.
With respect to the above section, the importance of articles of association can be summed up as follows:
- Binding on members in their relation to the company - the members are bound to the company by the provisions of the articles just as much as if they had all put their seals to them.
- Binding on company in relation to its members - just as members are bound to the company, the company is bound to the members to observe and follow the articles.
- Neither company, nor members bound to outsiders - articles bind the members to the company and company too the members but neither of them is bound to an outsider to give effect to the articles.
- Binding between members inter se - the articles define rights and liabilities of the members. As between members inter se the articles constitute a contract between them and are also binding on each member as against the other or others. Such contract can be enforced only through the medium of the company.
Difference between articles and memorandum.(S)
- The memorandum contains the fundamental condition upon which alone the company is allowed to be incorporated. The articles are for the internal regulation and management of the company.
- Memorandum defines the scope of the activities of the company, or the area beyond which the actions of the company cannot go. Articles are the rules for carrying out the objects of the company as set out in the memorandum.
- Memorandum being the character of the company, is the supreme document. Art are subordinate to the memorandum. If any conflict between them, the memorandum prevails.
- Every company must have its own memorandum. A company limited by shares need not have articles of its own. In such a case, Table A applies.
- An action of the company outside the scope of its memorandum is void and incapable of ratification. An act of the company outside the scope of its articles can be confirmed by the shareholders.
- There are strict restrictions on its alteration. The change of name requires the prior permission of central government and change of registered office to another state requires the prior approval of the Company Law Board. Articles can be altered by a special resolution, to any extent, provided they do not conflict with the memorandum and the Companies Act.
Alteration of articles (sec 31)(S)
Section 31 empowers every company to alter its articles at any time with the authority of a special resolution of the company and filing copy with the Registrar. Since it is a statutory power a company will not be deprived of the power of alteration by a contract wit anyone.
The power of alteration of articles conferred by sec 31 is almost absolute. It is subject only to two restrictions-
It must not be in contravention with the provisions of the Act. It is subject to the conditions contained in the memorandum of association. The proviso to sub-section (1) says that an alteration which has the effect of converting a public company into a private company would not have any effect unless it is approved by the Central Government.
Alteration against memorandum - in Hutton v. Scarborough Cliff Hotel Co , a resolution was passed in a general meeting of a company altered the articles by inserting the power to issue preference shares which did not exist in the memorandum. It was held inoperative.
is beyond the powers conferred on the company by the objects clause of its memorandum.
The application of the doctrine of ultra-vires was first demonstrated by the House of Lords in Ashbury Railway Carriage & Railway Co. v. Riche , where the mem of a co defined its objects: 1) to manufacture and sell railway carriages etc; 2) to carry on the business of mechanical engineers and general contractors. The company contracted with Richie to finance the construction of a railway line in Belgium and subsequently repudiated it as one beyond its powers. Richie brought an action for breach of contract. The House of Lords held that the contract was ultra vires and void. They were of the opinion that general terms like general contractors must be taken in reference to the main objects of the company which otherwise would authorize every kind of activity making the memorandum meaningless.
In the next leading case of Attorney General v. Great Eastern Railway Co , this doctrine was made clearer. The House of Lords held that the doctrine of UV as explained in Ashbury case should be maintained but reasonably understood and applied. Thus, an act which is incidental to the objects authorized ought not to be held as UV, unless it is expressly prohibited. Thus in Evans v. Brunner, Mond& Co , a chemicals manufacturing company was allowed to donate 1,00,000 pounds to universities and scientific institutions for research as this would be conducive for the progress of the company.
In India the Supreme Court has affirmed the doctrine in A Lakshmanaswami Mudaliar v. LIC , where the donation made as charity was held ultra vires and the directors were held personally liable to compensate the money.
Thus an act of the company is ultra vires if it is not a) Essential for the fulfillment of the objects stated in the memorandum; b) Incidental or consequential to that attainment of its objects c) Which the company is authorized to do by the Company’s Act, in course of its business.
Present position
In England the doctrine of ultra vires has been restricted by the European Communities Act, 1972. Thus, as against a third person acting in good faith, the company can no longer plead that the contract was ultra-vires.
In India, the principles laid down in Ashbury case are still applied without restrictions and modifications. Thus, in India the ultra vires act is still regarded, as void and it cannot be validated by ratification.
Consequences
- Injunction - whenever an ultra vires act has been or is about to be done, any member of the company can get an injunction to restrain the co from proceeding further.
- Personal liability of the directors- it is the duty of the directors to see that the funds of the company are used only for legitimate business of the company. If the funds of the company are used for a purpose foreign to its memorandum, the directors will be personally liable to restore it.
- Breach of warranty of authority - an agent who acts beyond the scope of his authority will be held personally liable. The directors of a company are its agents. If they induce an outsider to contract in a matter the company does not have power to act, they will be personally liable to him.
- Ultra vires acquired property - if a company’s money has been spent ultra vires in purchasing some property, the company’s right over that property must be held secure. For that asset, though wrongfully acquired, represents corporate capital.
- Ultra vires contracts - an ultra vires contract being void ab initio, cannot become intra vires by reason of estoppel, lapse of time, ratification, acquiescence or delay. No performance of either side can give an unlawful contract any validity or right of action upon it.
- Ultra vires torts - a company can be made liable for an ultra vires tort committed, provided, it is shown that a) The activity in the course of which it has been committed falls within the scope of the mem.
